I’ve been bearish on Bitcoin since it surged to almost $20,000 a little over a year ago. I think the cryptocurrency suffered from speculation that created an unsustainable bubble, a bubble that could still be deflating and could retreat by more than 90% from where it is now.
But am I wrong about Bitcoin? In December, my Foolish colleague Rupert Hargreaves punched out an interesting article that made me think about the whole cryptocurrency ‘asset’ class.
A tenuous case for the upside?
Although unlike a trading company, Bitcoin pays investors no dividend, generates no cash inflows, owns no tangible assets, and can’t add value to anything to generate wealth, it has one thing going for it. That ‘one thing’ is that the number of Bitcoins in existence is limited to 21m. So, the counter-argument to my bearishness is that demand for the virtual currency could rocket if people decide to adopt it as a mainstream currency, which could push the price up because of limited supply.
Rupert’s tantalising headline suggested $100,000 as a possibility, although he balanced that by saying that “If everyone suddenly stops using it, then the price will likely fall to zero.”
However, I think the case for Bitcoin at £100,000 is tenuous. I remember the long search for the creator of Bitcoin. In the end, some bloke (or several people) called Satoshi Nakamoto reckons he (or they) started it off. But how can we be sure? I reckon there’s a big flaw in the case for mainstream adoption of Bitcoin because if Satoshi Nakamoto declared the creation of 21m Bitcoins, what’s to stop some other person declaring the creation of 21m of something else to compete?
That’s already happening, of course. Witness the proliferation of Altcoins (or Alternatives to Bitcoin), such as Ethereum, Ripple, Monero and Bytecoin. Then there are all those so-called ‘forks’ where a single blockchain diverges into two paths. Bitcoin forks include Bitcoin Cash and Bitcoin Gold, and Ethereum forks include Ethereum Classic and Ethereum Fog, for example. Then we’ve got intentional forks, unintentional forks, hard forks, soft forks, and other nonsense that could work against an investment in Bitcoin.
A basketful of risks
Meanwhile, if you trade in cryptocurrencies, it pays to hold your nose. They’ve been popular in the criminal underworld and the US Commodity Futures Trading Commission has warned that virtual currencies are risky because the exchanges lack regulation or safeguards. That means they’re vulnerable to theft, hacking, fraud and market manipulation because of potential self-dealing by exchanges. Meanwhile, the Bank of International Settlements has cautioned that Bitcoin lacks any stability of price, requires high energy consumption, has high and variable transaction costs, and is vulnerable to debasement from forking.
It all paints a bleak picture for the outlook for Bitcoin. But The Economist threw a few crumbs of comfort to Bitcoin-believers in 2015 when it claimed some of the criticisms were unfair. The publication argued that the underlying blockchain technology is useful and Bitcoin’s volatility could settle down. But I must say there’s been scant evidence of those views over the ensuing three years! On balance, I’m sticking to my bearish stance on Bitcoin and will continue to seek my fortune in shares instead.